blog

11. 23. 2017

The future of banking: The rise of the platform giants

As conventional lenders are under threat from new competitors, digital transformation is no longer an option. It’s a matter of survival.

McKinsey’s new report reveals how technology giants are quickly eating away market share from traditional banks. Is the next financial crisis on its way?

According to McKinsey’s latest annual review on global banking, The Phoenix Rises: Remaking the Bank for An Ecosystem World, the threat from platform companies like Google, Amazon, Alibaba and Tencent is growing rapidly. Meaning that banks simply can’t afford to wait any longer to tap the potential of digitalization.

But how likely are retail and corporate customers to switch their banking to digital firms and what happens if they do? If we go by the rate at which people have adopted new technologies in the past, return on equity (ROE) in banking could fall by 4 percentage points to an unsustainable 5.2% by 2025. And that’s close to ROE levels last seen during the 2008 financial crisis.

Not a rosy picture

As more and more fintech firms and banks join forces, the much-discussed fintech threat to retail banking seems to be waning. No reason to rejoice though. Here come the new challengers: tech giants, aka platform companies. Having customer-centric strategies most banks could only dream of, they can win customers by cutting costs while boosting convenience.

As if that wasn’t enough, Amazon, Alibaba and their kind are pretty good at bridging the value chains of various industries, blurring sector boundaries and reshaping one industry after the other. And there’s still more to worry about. Platform companies have great customer data and know how to make the most of it, especially when it comes to customer journeys that include big financial decisions.

So what are the major threats or “the four horsemen of the e-pocalypse”?

disintermediation – banks lose access to customers who switch to non-banking channels (as clients can borrow online without reaching out to banks);

unbundling – products and services are no longer integrated, becoming unbundled (customers use third-party payment solutions such as PayPal);

invisibility – financial institutions are losing brand awareness and becoming invisible as customers can access financial services without even knowing the brand.

And just in case you’re wondering how much is at stake: a lot. McKinsey warns that platform companies expanding into financial services tend to target the rich returns of the distribution business, that is, the origination and sales side of banking. That’s what produced 47% of global banking revenues and 65% of profits last year. And this is a very juicy piece of the pie with an average ROE of 20%.

It’s not game over yet

Of course, it would be too early to give up on traditional banks. Financial service providers that successfully roll out a basic ecosystem strategy by building partnerships and monetizing data could crank up their ROE to about 9-10% by 2025. Banks that go further and create their own platforms could even snatch a share of non-banking markets, pumping up profitability to about 14%, far above the current average.

A full-scale digital transformation is essential. Not only for the economic benefits but also because it will earn banks the right to take part in the next phase of digital banking. As an important first step, banks that haven’t yet gone all-digital must find new tools and build skills in digital marketing and analytics. McKinsey did the math: if most of the industry were to do this, banks would add about $350 billion of annual income by 2025.

As far as digital sales goals are concerned, digital and analytical tools can help a great deal. These include portfolio overviews, event alerts, risk-monitoring tools, prospect trackers, client action planners, pitch libraries, financial simulators, all of which can easily be installed on a relationship manager’s tablet.

But to win back profits, many banks will probably need to go further than that. They will have to come up with a new strategy to respond to the looming emergence of digital ecosystems, where different industries fuse, offering users an end-to-end experience for a wide range of products and services through single access.